The Challenges Facing the ‘Digital Dollar’

Editor’s note: We don’t often focus on cryptocurrencies here at Weiss Ratings Daily. However, with many of these digital tokens’ prices doubling already this year, it is simply a sector you can no longer ignore. For this reason, we’ve asked Jurica Dujmovic to catch us up on CBDCs and what they mean for cryptos going into 2024. Here he is …


by Jurica Dujmovic
By Jurica Dujmovic

I’m a staunch advocate for cryptocurrencies. That should be no surprise to you by now. And I have made clear before that I am a critic of central bank digital currencies (CBDCs) — like a so-called “digital dollar.”

So, that’s why the recent report from the Bank for International Settlements (BIS) on the challenges central banks face in adopting CBDCs brings a sense of vindication. The report highlights significant gaps in the expertise and skill of central banks in managing CBDCs, indicating potential delays in their implementation.

This development is crucial because, as we delve deeper into the nature of CBDCs, the more apparent it becomes why their widespread adoption should be a concern for anyone who values financial freedom and privacy.

Before discussing the report, however, let’s review why CBDCs are detrimental to financial freedom, privacy and security of literally everyone everywhere.

Unlike traditional digital fiat currencies — i.e., the money in your bank account — CBDCs represent a fundamental shift by creating a direct digital tether between citizens and the central bank. This change could have far-reaching implications for individual privacy and financial autonomy.

CBDCs lack the privacy protections and the finality that cash provides, placing citizens' financial activities under potential surveillance and control by governments.

One of the primary risks of CBDCs is the erosion of financial privacy. Governments could, with ease, monitor and potentially control citizens' financial activities. This scenario is not just about tracking spending habits — it extends to more invasive measures like freezing or seizing assets.

With a CBDC, the process of locking an individual out of the financial system becomes more straightforward and faster for governments, which is a terrifying prospect for personal freedom.

Another alarming aspect is the possibility of implementing negative interest rates through CBDCs. In a traditional banking system, negative rates are hard to enforce. But with CBDCs, they could become a reality, effectively leading to a scenario where people lose money simply by holding onto their digital currency.

This approach could be used under the guise of spurring spending but at the cost of individual financial autonomy.

The programmability of CBDCs opens another can of worms. The government could restrict purchases of certain goods or limit the amount one can buy, directly intervening in personal choices and freedom. For instance, limiting alcohol purchases or prohibiting them for individuals with certain offenses could be easily implemented through CBDCs.

Furthermore, CBDCs could fundamentally disrupt the financial markets by reducing credit availability, disintermediating banks and, crucially, challenging the rise of cryptocurrencies. The adoption of CBDCs could undermine the very foundation and future of a decentralized financial system, which cryptocurrencies strive to establish.

Case in point, the central storage of financial information with CBDCs is a significant risk. In case of a breach, unlike a breach at a private financial institution that affects a limited number of people, a breach in a CBDC system could potentially expose the financial data of an entire nation. 

Turning now to the BIS report, it serves as a stark reminder of the complexities and potential pitfalls in the rocky journey toward CBDCs. It candidly admits that central banks are currently ill-equipped to manage the risks associated with CBDCs. This lack of preparedness is not a minor hiccup. It's a glaring deficiency that could significantly delay the rollout of CBDCs.

The report continues to say that central banks lack the internal capabilities and skills necessary to effectively implement and manage CBDCs, especially concerning the adoption of complex technologies like distributed ledger technology. This technology, while being the backbone of cryptocurrencies, presents a whole new world of challenges for traditional banking institutions.

The BIS report also urges central banks to view CBDCs not merely as a technological advancement but as a fundamental shift in their operational model. This recognition is significant as, by forcing the recognition of CBDCs as fundamentally different, it is requiring the acknowledgement that new infrastructure and tools are required to implement them safely … which was not universally understood previously.

The report even suggests that central banks should continuously assess and manage the risks associated with CBDCs, given their varying nature across different countries and over time.

The need for robust business continuity plans is another crucial aspect highlighted in the report. This requirement isn't just about ensuring operational efficiency. It's about safeguarding the financial system against potential disruptions that could lock citizens out of their own money — a scenario that's antithetical to the freedom and autonomy cryptocurrencies offer, not to mention the freedom that most developed Western countries say they intend to uphold.

What's more, the BIS Chief Augustin Carstens has underscored the importance of nations collaborating to establish a set of consistent rules for CBDCs, emphasizing not just technological advancements but the need for a sophisticated legal framework. 

This perspective further complicates the CBDC landscape, as we already are aware how long and complicated the path to common-sense regulation can be. And it is too easy for regulation on a centralized digital asset such as a CBDCs to cross a line that flies in the face of the trustless nature of crypto as well.

So, while the eventual arrival of CBDCs seems inevitable, the BIS report is a testament to the numerous hurdles that lie ahead.

For crypto enthusiasts, this is an opportunity. It's a chance to relentlessly advocate for the advantages of cryptocurrencies — their decentralized nature, the autonomy they offer users and the security of blockchain technology.

As central banks struggle to come to grips with the challenges of implementing CBDCs, the crypto community can continue to innovate, grow and perhaps even turn the tide in favor of a more decentralized financial future.



About the Digital Artist & Crypto Specialist

Jurica Dujmović has been a creator, collector and investor in digital art, including the rapidly evolving non-fungible tokens (NFT) space since its inception nearly a decade ago. He’s also passionate about digital currencies and writes about crypto trends, including what’s new in the Weiss Crypto Ratings, in Weiss Crypto Daily. 

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